Global oil demand may suffer as crude nears $80, warns IEA

Javier Moore |Thursday, May 17, 2018

Spencer Platt Getty Images AFP

Retail gasoline prices are up 6 percent since the start of the month and, while a switch to a more expensive summer blend is contributing to the rise, the decision by U.S. President Donald Trump to walk away from the Iranian nuclear agreement was a supporting factor. Drillers added 10 oil rigs in the week to May 11, bringing the total count to 844 - the highest since March 2015.

Gasoline demand is up 0.7 percent from a year ago over the past four weeks to 9.4 million bpd. Traders say the surge in US exports to more than 2 million bpd has saturated some markets, leaving benchmark prices ripe for a correction.

Current prices are far higher than the United States Energy Information Administration (EIA's) May Short-Term Energy Outlook forecasts, which put Brent crude oil price at an average of $71 per barrel in 2018, $7 per barrel higher than last month's forecast.

The "outlier", as has been the case for the past few years, is the USA tight oil industry, where investments rose by more than 42% y/y in 2017, to about $138 billion.

The bottleneck in North America likely contributed to a 4.9 million barrel rise in USA crude oil inventories, to 435.6 million barrels, that the private American Petroleum Institutereportedon Tuesday. An exected drawdown is U.S. stockpiles could see WTI break higher once more. Investors are keeping a close watch on how much crude will end up being removed from the global market, and whether other major producers will ramp up output to fill any gaps.

However analysts at Goldman Sachs said that even with such a slowdown, and rising USA shale production, supply problems would remain - pointing to production losses in Iran as well as Venezuela and Angola.

Critically, the USA market is moving into its peak demand period, and this time of the year, inventories typically fall.

Despite these downward forces, the market retains support from OPEC and other producers' production cuts and USA sanctions on Iran.

OPEC is forecasting US liquids production this year to increase by 1.5 million b/d, with 94% from tight crude and unconventional natural gas liquids, on increased investments and upgraded completion metrics, versus 90% in 2017. However the IEA - which advises oil-consuming nations - has warned that prices are high enough to hurt consumption, and trimmed its forecasts for demand growth. As a result, oil prices have gradually risen during the period.

OPEC and its allies have finally succeeded in their 16-month campaign to clear a global oil glut, with inventories falling below their five-year average for the first time since 2014, the agency said. With Saudi Arabiasignaling that it wants prices in the $80-100 range, the kingdom's ambitious goals of its initial public offering and social spending are distorting OPEC's strategy. The push for higher oil prices has been, in large part, engineered by Saudi Arabia to pay for its domestic programs. As Reutersnoted, based on conversations with OPEC sources: "OPEC is in no hurry to decide whether to pump more oil to make up for an expected drop in exports from Iran".

It's interesting that, despite all the noise, Iranian oil is still selling at a premium. "But I think they'll be watching to see how quickly the sanctions come back and impact Iran's ability to place their barrels".

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